Kentucky Supreme Court: FAA Doesn't Preempt Kentucky’s Ban on Mandatory Employment Arbitration

Meanwhile, back in Kentucky, employers are thinking about next steps in the wake of Northern Kentucky Area Development District v. Synder, decided Sept. 27, 2018. There, the Kentucky Supreme Court held that the Federal Arbitration Act of 1925 ("FAA") does not preempt a Kentucky statute that, among other things, bans employers from making arbitration of employment disputes a condition of employment. Given how at least four US Supreme Court Justices may want to read the FAA, Synder might soon be headed to Washington.

The background: The FAA provides that an arbitration agreement "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. The US Supreme Court today reads this as "a sort of 'equal-treatment' rule for arbitration contracts" that preempts any law that discriminates against arbitration, either on its face or covertly, such as by interfering with some fundamental attributes of arbitration. Epic Systems Corp. v. Lewis, 138 S.Ct. 1612, 1622 (2018).

In 1994, the Kentucky legislature enacted this statute:

[N]o employer shall require as a condition or precondition of employment that any employee or person seeking employment waive, arbitrate, or otherwise diminish any existing or future claim, right, or benefit to which the employee or person seeking employment would otherwise be entitled under any provision of the Kentucky Revised Statutes or any federal law.

Ky. Rev. Stat. § 336.700(2). About a year later, the Sixth Circuit read the FAA workers exemption, 9 U.S.C. § 1, to cover only transportation workers. Asplundh v. Tree Expert Co. v. Bates, 71 F.3d 592, 600-02 (6th Cir. 1995); see also Circuit City v. Adams, 532 U.S. 105 (2001)(adopting this view).

Some years later, the lawsuit: After getting fired, Danielle Synder sued her former employer, a State government entity, for violating State whistleblower and wage-and-hour law. The employer sought to compel arbitration pursuant to the mandatory arbitration clause in her employment contract. The lower courts denied the employer's motion on the ground that Ky. Rev. Stat. § 336.700(2) had rendered that clause unenforceable.

So, why doesn't the FAA preempt that statute? In Synder, the Kentucky Supreme Court reasoned that the statute satisfied the FAA's equal-treatment rule, for two main reasons. First, the statutes doesn't single out arbitration clauses. Rather, it treats arbitration as only an example of an agreement that tends to "diminish" a worker's rights, claims, or benefits ("waive, arbitration, or otherwise diminish"). Other examples include "an agreement whereby the employee waives the ability to file a [Kentucky Whistleblower Act] claim against the employer, or an agreement that limits the amount of damages the employee can recover against the employer." Slip Op. at 12. This reasoning implies that the FAA permits Kentucky's statute even though the US Supreme Court reads the FAA as endorsing the idea that employment arbitration does not tend to diminish workers' legal protections.

Second, the statute "only proscribes conditioning employment on agreement to arbitration, not the act of agreeing to arbitration." Slip Op. at 9. Thus, the statute does not "invalidate arbitration contracts because they are arbitration contracts; KRS 336.700(2) only invalidates arbitration contracts when the employer evidences an intent to fire or refuse to hire an employee because of that employee’s unwillingness to sign such a contract. This is not an attack on the arbitration agreement—it is an attack on the employer for basing employment decisions on whether the employee is willing to sign an arbitration agreement." Id. at 11. In this respect, the statute is a generally-applicable "antiemployment discrimination provision." Id. at 12. The premise here: Making employment arbitration mandatory (a condition of employment) isn't a fundamental attribute of such arbitration.

In so reasoning, the Kentucky Supreme Court did not follow the plaintiff's lead. She'd argued more narrowly: Because her former employer was a political subdivision of the State, the FAA couldn't be read to supplant statutory restrictions on her government employer's powers without raising concerns of "federalism and the Tenth Amendment." It's unclear how much that litigating position will affect the odds that, if asked, the US Supreme Court will hear this case.

--Sachin Pandya